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Ch., July 2, 2008), read opinion here , denied a motion to dismiss the case on forum non … The Court also addresses the first-filed rule under the Mc Wane …
opinion abruptly concluded that “[t]he Complaint alleges facts that support a finding that the Defendants breached their fiduciary duties to Debtor.” Although the court’s brevity on this issue is perhaps regrettable in light of the resulting confusion the opinion has spawned, it is certainly understandable that the bankruptcy court did not feel compelled to delve into the specific supporting allegations, considering the context in which this opinion issued.Accordingly, with the benefit of the less rigorous notice pleading standards under the federal rules, it is likely that the plaintiff’s claim would have survived a Rule 12(b)(6) motion to dismiss even if the defendants directly challenged the sufficiency of its allegations under Bankruptcy Trustee Standing, and Deepening Insolvency The principal arguments the defendants presented in support of dismissal of the complaint should have been (and were) quickly disposed of by the bankruptcy court. Rejecting this proposition, the bankruptcy court declined to extend the trustee alleged that the director- and shareholder-defendants had engaged in self-dealing and acted in bad faith and with gross negligence by, among other things, not causing the debtor to file bankruptcy sooner and not providing WARN Act notices to employees, despite having actual knowledge that the lender had terminated any forbearance and was about to sweep all of the debtor’s cash. .”complaint appears to allege with some specificity that the defendants consciously and in bad faith ignored a known duty to provide the WARN Act notice.The defendants argued that because the debtor was alleged to have been indisputably insolvent during the entire period when the WARN Act notice might have been provided, the trustee lacked standing. The court reasoned that the trustee’s complaint did not implicate deepening insolvency because, instead of charging the defendants with causing the debtor’s insolvency, it sought redress for “the Defendants’ failure to act in the face of insolvency itself . The trustee alleged, in substance, that by failing to act, the defendants proximately caused the debtor to incur a substantial liability for which it would not otherwise have been exposed (and for which it received nothing of value).Instead (and somewhat puzzlingly), the defendants challenged the sufficiency of the complaint on two grounds unrelated to : (1) that the trustee-plaintiff lacked standing to bring a claim on behalf of the debtor’s estate for what was argued to be an injury only to the debtor’s creditors; and (2) that the plaintiff’s claim was really a disguised “deepening insolvency” claim, a theory of liability that Delaware courts have squarely rejected. In further support of this position, the defendants sought to persuade the bankruptcy court that the trustee’s claim was really in the nature of a deepening insolvency theory of liability, which Delaware law has eschewed. whether the claims are direct or derivative in nature.” Addressing the defendants’ attempts to characterize the trustee’s allegations as a deepening insolvency claim, the court observed: The court later concluded (albeit in somewhat summary fashion) that this case was one in which the trustee adequately alleged the defendants’ conscious disregard for their duties by their knowing failure, without justification, to provide the WARN Act notice to affected employees.Accordingly, in view of how the parties had framed the issues in dispute, the bankruptcy court did not need to closely examine the complaint’s -claim-related allegations to dispose of the defendants’ motion to dismiss. The defendants argued at ¶ 28 that “an already insolvent company, with no prospects of reorganization and headed immediately towards a chapter 7 liquidation with no hope of satisfying its current liabilities, cannot be damaged by the existence of an additional claim subsequently lodged against the estate.”Relying on a well-developed body of bankruptcy law in the Third Circuit and elsewhere, the bankruptcy court rejected this position, noting that “[t]he Trustee is charged with pursuing the estate’s interests . Although the understanding of the opinion once again could have benefitted from some further explanation of why the court reached the result it did, the answer to that question becomes clear upon examination of this decision in the context of the Delaware bankruptcy court’s other decisions addressing what remains of the deepening insolvency theory post-the court explored the boundaries of what was and was not an impermissible deepening insolvency claim under Delaware law.
These allegations included the following: The cumulative import of these allegations, if true, was to establish (1) the inevitability that the debtor’s business would have to be shut down for lack of funding; (2) the defendants’ awareness for months prior to the date that the debtor discontinued operations that the debtor would run out of money to operate; (3) the absence of any efforts to address the debtor’s financial distress; (4) the defendants’ failure to provide 60-days advance notice of the shutdown as mandated by the WARN Act; and (5) the inapplicability of any exceptions or exemptions to the WARN Act notice requirement. The defendants made the now-familiar argument that the trustee’s claims, despite not being expressly denominated as deepening insolvency claims, were just that.